Cliff Asness: enterprise value tax is "pernicious" and "economically destructive"

By Lawrence Delevingne

Wed Mar 13, 2013


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The AQR founder slams the potential for carried interest-related tax changes in a WSJ op-ed.


   
 

 Cliff Asness (Photo: Bloomberg)

Never shy to voice his discontent with Washington--and Democrats in particular--Cliff Asness is getting ahead of another political tax debate.

The libertarian-leaning AQR Capital Management founder and his chief risk officer, Aaron Brown, argued in a Wall Street Journal op-ed on Monday that attaching the so-called enterprise value tax to a change in carried interest treatment would be "pernicious and economically destructive." It's not the first time he's raised the issue, having previously discussed it at the 2011 Delivering Alpha conference.

The profits from the sale of a business are taxed at a lower capital gains rate, which recognizes the gains in the value of the enterprise. But proposals from the White House and Congressional Democrats in recent years have called for the enterprise value of certain investment services businesses--including hedge, private equity and venture capital funds--to be taxed at higher ordinary income rates.

"The Enterprise Value Tax is a step toward selective punitive wealth taxes. Under the false cover of 'fixing' the treatment of carried interest, it would tax the life's work of one group of entrepreneurs while ignoring all the rest," Asness and Brown wrote. "It would open the door to other targeted wealth taxes, a dangerous and addictive drug. If Republicans regained power, would they pursue taxes only on left-leaning filmmakers? The EVT should be stopped before it starts."

Asness is apparently trying to get ahead of the debate. The enterprise value tax was a hot topic in 2010 and 2011 when it was included in draft legislation that never made it through Congress, but it has not been a focus of the hedge fund industry for more than a year. Still, as Washington renews the debate about how to cut the deficit, carried interest and enterprise value could easily be included in proposals to raise revenue.

Asness argues that most hedge funds don't benefit from carried interest treatment because their trading is relatively short term, as it is at quantitatively-focused AQR. Instead, the motive is raise government revenue from an easy-to-target group.

"Also driving the EVT push is the fact that investment managers--hedge-fund managers in particular--are unpopular," the op-ed said. "Yet the tax would apply not just to hedge funds but to a much broader class of investment partnerships across industries from real estate to manufacturing. Many of these (like hedge funds) never much benefited from the treatment of carried interest. And what should popularity have to do with tax rates anyway?"

See also: Goldman Sachs, SkyBridge among Mitt Romney's hedge fund bundlers | Jim Chanos: Don't blame Obama for market sell-off | The tax bite looms--again